Have you checked your credit score (FICO score) recently? If so, you may have noticed that although you haven’t initiated any changes, your score may have dropped a few points. And in an economy where a score above 700 is a necessity these days, a lowered credit score can be a huge financial burden.
So what happened to make credit scores drop? There are two main reasons. The first is that just like mortgage rates, default credit card interest rates have risen nearly 50% since 2008. More than 11% of Americans saw their interest rates jump by double digits during this time. When you have higher interest rates, your credit score can be adversely affected, although you’ve taken no action to make this happen.
Second, worry over pending legislation that would tighten the profits of credit card companies (but immensely benefit consumers) is causing lenders to tighten their belts. They are lowering credit limits, closing inactive accounts, discontinuing rewards programs and rescinding balance transfer offers. The lowered credit limits have the biggest impact on reducing credit scores because they increase the debt-to-credit limit, or utilization, ratio. Since this ratio accounts for 30% of your FICO score, even the smallest limit reduction can harm your credit. Here are other factors that are affecting consumers directly:
As people depend more and more on credit cards to make ends meet, debt levels are steadily rising. Increased debt on your accounts can cause a drop in your credit score over time. Most experts recommend that you carry no more than 10% to 30% of your available spending limit at any given time. But this is particularly difficult now, since many companies are shrinking credit limits to a fraction of the original allotments.
It’s a fact that some people simply can’t make their payments on time every month, and credit card companies are being less lenient with missed and late payments. Even if you make a payment one day beyond your due date, some creditors will automatically increase your interest rate and slap you with a penalty of $30 or more.
Cancellation Due to Non-Use
Even if you don’t use a card, you may find that the company closes it for non-use. This can hamper your FICO score just as much as carrying a large balance would.
What Can You Do?
Pay off the cards with the highest rates of interest and the highest balances first. From there, pay more than the minimum balance on all remaining cards and avoid common mistakes such as excessive credit applications, missed payments and late payments.
From there, you can work to negotiate with creditors to decrease your current debt. A quick call to your credit card company can get the ball rolling. Explain that you’ve got financial hardship and that you simply can’t pay off your balance. Many companies will negotiate with you to pay a lower balance without requiring that you hire a lawyer or file for bankruptcy.
—For more ways to save, spend, invest and borrow, visit MainStreet.com.